Skip to content

FRM Part I · FRM Exam Part I · Options Markets

A stock trades at $60. A company pays a $2 cash dividend, and the option exchange's standard rules apply to an exchange-traded call with a strike of $55. Which statement is correct?

No adjustment is made. Exchange-traded options are normally protected against stock splits and stock dividends, but not against ordinary cash dividends. A $2 dividend therefore leaves the strike and contract size unchanged, which is why holders may consider exercising calls early just before ex-dividend dates.

  1. AThe strike is reduced to $53 because of the dividend
  2. BThe number of contracts is increased by 2/55
  3. CThe strike is reduced to $53 only if the dividend exceeds 10% of the stock price
  4. DNo adjustment is made to the contract terms for the cash dividendCorrect

Explanation

Exchange-traded options are generally not adjusted for ordinary cash dividends; they are adjusted for stock splits and stock dividends. This is why early exercise before ex-dividend dates can matter for calls. A $2 dividend on a $60 stock is ordinary and triggers no adjustment.

Did you get it right without looking?

One question tells you little. A timed set on Options Markets shows your real accuracy, how long you take and where you lose marks.

Practise Options MarketsFree diagnostic mock

More Options Markets questions